FPIF Policy Report

Fisk with more info on upcoming petrowar 
 
Renner's analysis of the post Saddam oil spoils in more detail...
http://www.fpif.org/papers/oil.html


FPIF Policy Report
January 2003
Post-Saddam Iraq:
Linchpin of a New Oil Order
By Michael Renner, Worldwatch Institute
Michael Renner  is a Senior Researcher at Worldwatch
Institute and a policy analyst for Foreign Policy In Focus (online at
www.fpif.org).

Contents
Oil Forever
Iraq: From Pariah to Fabulous Prize
Oil Company Interests
Rivalries & Quid Pro Quos
From Surrogates to Direct Control

EndNotes

 PRoil.pdf


Only in the most direct sense is the Bush administration's Iraq policy
directed against Saddam Hussein. In contrast to all the loud talk about
terrorism, weapons of mass destruction, and human rights violations, very
little is being said about oil. The administration has been tight-lipped
about its plans for a post-Saddam Iraq and has repeatedly disavowed any
interest in the country's oil resources. But press reports indicate that
U.S. officials are considering a prolonged occupation of Iraq after their
war to topple Saddam Hussein. It is likely that a U.S.-controlled Iraq will
be the linchpin of a new order in the world oil industry. Indeed, a war
against Iraq may well herald a major realignment of the Middle East power
balance.

--------------

Oil Forever

The Bush administration's ties to the oil and gas industry are beyond
extensive; they are pervasive. They flow, so to speak, from the top, with a
chief executive who grew up steeped in the culture of Texas oil exploration
and tried his hand at it himself; and a second-in-command who came to office
with a multi-million dollar retirement package in hand from his post of CEO
of Halliburton Oil. Once in office, the vice president developed an energy
policy under the primary guidance of a cast of oil company executives whose
identities he has gone to great lengths to withhold from public view. Since
taking office, the president and vice president have assembled a government
peopled heavily with representatives from the oil culture they came from.
These include Secretary of the Army Thomas White, a former vice president of
Enron, and Secretary of Commerce Don Evans, former president of the oil
exploration company Tom Brown, Inc., whose major stake in the company was
worth $13 million by the time he took office.

The Bush administration's energy policy is predicated on ever-growing
consumption of oil, preferably cheap oil. U.S. oil consumption is projected
to increase by one-third over the next two decades. The White House is
pushing hard for greater domestic drilling and wants to open the Arctic
National Wildlife Refuge to the oil industry. Even so, the administration's
National Energy Policy Development Group, led by Vice President Cheney,
acknowledged in a May 2001 report that U.S. oil production will fall 12%
over the next 20 years. As a result, U.S. dependence on imported oil-which
has risen from one-third in 1985 to more than half today-is set to climb to
two-thirds by 2020.1

Since the 1970s, the U.S. has put considerable effort into diversifying its
sources of supply, going largely outside of OPEC and outside the Middle
East. The current administration is advocating greater efforts to expand
production in such far-flung places as the Caspian area, Nigeria, Chad,
Angola, and deep offshore areas in the Atlantic basin and is looking to
leading Western Hemispheric suppliers like Canada, Mexico, and Venezuela.2
West Africa is expected to account for as much as a quarter of U.S. oil
imports a decade from now.3

But there is no escaping the fact that the Middle East-and specifically the
Persian Gulf region-remains the world's prime oil province, for the U.S. and
for other importers. Indeed, the Cheney report confirms that "by any
estimation, Middle East oil producers will remain central to world oil
security." The Middle East currently accounts for about 30% of global oil
production and more than 40% of oil exports. With about 65% of the planet's
known reserves, it is the only region able to satisfy the substantial rise
in world oil demand predicted by the Bush administration.4 The Cheney report
projects that Persian Gulf producers alone will supply 54-67% of world oil
exports in 2020.5

Saudi Arabia is a pivotal player. With 262 billion barrels, it has a quarter
of the world's total proven reserves and is the single largest producer.6
More importantly, the Saudis have demonstrated repeatedly-after the Iranian
revolution, and following Iraq's invasion of Kuwait-that they are prepared
to compensate for losses from other suppliers, calming markets in times of
turmoil. Today, Riyadh could raise its production of 8 million barrels per
day (b/d) to 10.5 million b/d within three months, making up for any loss of
Iraqi oil during a U.S. military assault.7

Iraq: From Pariah to Fabulous Prize

The pariah state of Iraq, however, is a key prize, with abundant,
high-quality oil that can be produced at very low cost (and thus at great
profit). At 112 billion barrels, its proven reserves are currently second
only to Saudi Arabia's. The Energy Information Administration (EIA) of the
U.S. Department of Energy estimates that additional "probable and possible"
resources could amount to 220 billion barrels. And because political
instability, war, and sanctions have prevented thorough exploration of
substantial portions of Iraqi territory, there is a chance that another 100
billion barrels lie undiscovered in Iraq's western desert. All in all, Iraq'
s oil wealth may well rival that of Saudi Arabia.8

At present, of course, this is mere potential-the Iraqi oil industry has
seriously deteriorated as a result of the 1980-88 Iran-Iraq War, the 1991
Gulf War, and inadequate postwar investment and maintenance. Since 1990, the
sanctions regime has effectively frozen plans for putting additional fields
into production. It has also caused a severe shortage of oil field equipment
and spare parts (under the sanctions regime, the U.S. has prevented
equipment imports worth some $4 billion). Meanwhile, questionable methods
used to raise output from existing fields may have damaged some of the
reservoirs and could actually trigger a decline in output in the short run.9

But once the facilities are rehabilitated (a lucrative job for the oil
service industry, including Vice President Cheney's former employer,
Halliburton) and new fields are brought into operation, the spigots could be
opened wide. To pay for the massive task of rebuilding, a post-sanctions
Iraq would naturally seek to maximize its oil production. Some analysts,
such as Fadhil Chalabi, a former Iraqi oil official, assert that Iraq could
produce 8-10 million b/d within a decade and eventually perhaps as much as
12 million.10

The impact on world markets is hard to overstate. Saudi Arabia would no
longer be the sole dominant producer, able to influence oil markets
single-handedly. Given that U.S.-Saudi relations cooled substantially in the
wake of the September 11, 2001, terrorist attacks-rifts that may widen
further-a Saudi competitor would not be unwelcome in Washington. An unnamed
U.S. diplomat confided to Scotland's Sunday Herald that "a rehabilitated
Iraq is the only sound long-term strategic alternative to Saudi Arabia. It's
not just a case of swapping horses in mid-stream, the impending U.S. regime
change in Baghdad is a strategic necessity."11

Washington would gain enormous leverage over the world oil market. Opening
the Iraqi spigot would flood world markets and drive prices down
substantially. OPEC, already struggling with overcapacity and a tendency
among its members to produce above allotted quotas (an estimated 3 million
barrels per day above the agreed total of 24.7 million b/d), might unravel
as individual exporters engage in destructive price wars against each
other.12

A massive flow of Iraqi oil would also limit any influence that other
suppliers, such as Russia, Mexico, and Venezuela, have over the oil market.
Lower prices could render Russian oil-more expensive to
produce-uncompetitive, which would cloud the prospects for attracting
foreign investment to tap Siberian oil deposits.13 Russia's weak economy is
highly dependent on oil export revenues. Its federal budget is predicated on
prices of $24-25 per barrel.14 Aleksei Arbatov, deputy chairman of the
Russian parliament's defense committee, predicts that if a new Iraqi regime
sells oil without limits, "our budget will collapse."15

Oil Company Interests

To repair and expand its oil industry, Iraq will need substantial foreign
investment. Thus, for eager oil companies, Iraq represents a huge bonanza-a
"boom waiting to happen," according to an unnamed industry source.16

Leading Oil Companies, 2000
The 10 leading companies in each category are highlighted in the respective
columns.

Oil Reserves (billion barrels) Oil Production (million b/d) Refining
Capacity (million b/d) Product Sales (million b/d)
Saudi Aramco 261.8 8.6 2.1 3.0
INOC (Iraq) 112.5 2.6 0.4 0.4
KPC (Kuwait) 96.5 1.7 1.0 0.9
NIOC (Iran) 89.7 3.8 1.5 1.3
PDV (Venezuela) 77.7 3.3 3.1 3.2
ADNOC (United Arab Emirates) 53.8 1.4 0.2 0.2
Pemex (Mexico) 28.3 3.5 1.5 2.1
NOC (Libya) 23.6 1.3 0.3 0.3
Lukoil (Russia) 14.3 1.6 0.5 0.9
NNPC (Nigeria) 13.5 1.3 0.4 0.3
ExxonMobil (U.S.) 12.2 2.6 6.2 8.0
PetroChina 11.0 2.1 1.9 1.1
Royal Dutch/Shell (UK/Netherlands) 9.8 2.3 3.2 5.6
British Petroleum 7.6 1.9 3.2 5.5
TotalFinaElf (France) 7.0 1.4 2.6 3.1
ChevronTexaco (U.S.) 8.5 2.0 2.1 4.0
Petrobras (Brazil) 8.4 1.3 1.9 2.2
Sinopec (China) 3.0 0.7 2.6 1.3
Nippon Mitsubishi (Japan) 0.05 0.05 1.3 1.4
WORLD 1,046.2 74.5 81.6
Source: Adapted from Energy Intelligence Group.
State-owned companies are in italics (state ownership is 100 percent, except
for the following: PetroChina (90 percent), Sinopec (57 percent), and the
majority privately owned Petrobras (32.5 percent) and Lukoil (14.1
percent)).

Prior to the OPEC revolution in the early 1970s, a small number of companies
(referred to as the "majors" or "Seven Sisters") called the shots in the
industry, controlling activities from exploration and production to refining
and product sales. But they lost much of their reserve base, as
nationalization spread through the Middle East and OPEC nations. Today,
state oil companies own the vast majority of the world's oil resources. Even
though private companies still do much of the exploring, drilling, and
pumping, in many countries they have access to the oil only under prices and
conditions set by the host government. Although oil companies have managed
to adjust to this situation, a directly owned concession would offer them
far greater flexibility and profitability.

The dominant private companies (ExxonMobil and Chevron-Texaco of the U.S.,
Royal Dutch-Shell and BP of Britain and the Netherlands, TotalFinaElf of
France), which are largely the result of recent megamergers, sell close to
29 million barrels per day in gasoline and other oil products. But
production from fields owned by these "super-majors" came to 10.1 million
barrels per day in 2001, or just 35% of their sales volume.17 Although these
corporations have poured many billions of dollars into discovering new
fields outside the Middle East, their proven reserves stood at just 44
billion barrels in 2001, 4% of the world's total and sufficient to keep
producing oil for only another 12 years at current rates.18 The situation is
similar for other oil companies. Thus, the oil-rich Middle East, and
particularly Iraq, remains key to the future of the oil industry.

If a new regime in Baghdad rolls out the red carpet for the oil
multinationals to return, it is possible that a broader wave of
denationalization could sweep through the oil industry, reversing the
historic changes of the early 1970s. Squeezed by a decade of sanctions, the
current regime has already signaled that it is prepared to provide more
favorable terms to foreign companies.19 Such an invitation by Baghdad would
be in tune with larger changes that are afoot, as a growing number of oil
producing countries are opening their industries to foreign direct
investment.20

Rivalries & Quid Pro Quos

Several European and Asian oil companies have in recent years signed deals
with Iraq that, if consummated, would give them access to reserves of at
least 50 billion barrels and a potential output of 4-5 million barrels per
day (another estimate says that Russian companies alone have signed deals
involving about 70 billion barrels). In addition, a number of contracts have
been signed for exploration in the western desert.21

Russian, Chinese, and French companies in particular have tried to position
themselves to develop new oil fields and to rehabilitate existing ones, once
UN sanctions are lifted. Russia's Lukoil, for instance, signed an agreement
in 1997 to refurbish and develop the West Qurna field (with 15 billion
barrels of oil reserves). China's National Petroleum Corporation signed a
deal for the North Rumailah reservoir. And France's TotalFinaElf has set its
eyes on the giant Majnoon deposits (holding 20-30 billion barrels).22

Iraq has sought to use the lure of oil concessions to build political
support among three permanent Security Council nations-France, Russia, and
China-for a lifting of sanctions. Although the international consensus in
favor of sanctions has badly eroded, this gamble has failed to pay off in
the face of determined U.S. and British opposition. (In December 2002, Iraq
cancelled a contract with three Russian companies, out of frustration that
the firms-in deference to sanctions-had not commenced oil exploration work.)
As long as Saddam Hussein stays in power, U.S. and British companies will be
kept out of Iraq, but ongoing sanctions will also thwart existing oil
development plans.

"Regime change" in Baghdad would reshuffle the cards and give U.S. (and
British) companies a good shot at direct access to Iraqi oil for the first
time in 30 years-a windfall worth hundreds of billions of dollars. U.S.
companies relish the prospect: Chevron's chief executive, for example, said
in 1998 that he'd "love Chevron to have access to" Iraq's oil reserves.23

In preface to the passage of Security Council Resolution 1441 on November 8,
there were thinly veiled threats that French, Russian, and Chinese firms
would be excluded from any future oil concessions in Iraq unless Paris,
Moscow, and Beijing supported the Bush policy of regime change. Ahmed
Chalabi, leader of the Iraqi National Congress (INC), an exile opposition
group favored by the Bush administration, said that the INC would not feel
bound by any contracts signed by Saddam Hussein's government and that
"American companies will have a big shot at Iraqi oil" under a new regime.
U.S. and British oil company executives have been meeting with INC
officials, maneuvering to secure a future stake in Iraq's oil.24 Meanwhile,
the State Department has been coaxing Iraqi opposition members to create an
oil and gas working group involving Iraqis and Americans.25

Nikolai Tokarev, general director of Russia's Zarubezhneft, a state-owned
oil company, reflected in late 2002: "Do Americans need us in Iraq? Of
course not. Russian companies will lose the oil forever if the Americans
come."26 Fears of being excluded from Iraq's oil riches and losing influence
in the region have fed Russian, French, and Chinese interest in constraining
U.S. belligerence. These countries nonetheless are eager to keep their
options open in the event that a pro-U.S. regime is installed in Baghdad,
avoiding the "risk of ending up on the wrong side of Washington," as the New
York Times put it.27

Rival oil interests were a crucial behind-the-scenes factor as the permanent
members of the UN Security Council jockeyed over the wording of Resolution
1441, intended to set the conditions for any action against Iraq. It is
likely that backroom understandings regarding the future of Iraqi oil were
part of the political minuet that finally led to the resolution's unanimous
adoption. U.S. promises that the other powers would get a slice of the pie,
hinted at in broad terms, were apparently inducement enough to win their
nod. It is thus unlikely that French, Russian, and Chinese companies will be
completely locked out of a post-Saddam Iraq, though they could find
themselves in a junior position.

From Surrogates to Direct Control

Throughout the history of oil, sorting out who gets access to this highly
prized resource and on what terms has often gone hand in hand with violence.
At first it was Britain, the imperial power in much of the Middle East, that
called the shots. But for half a century, the U.S.-seeking a preponderant
share of the earth's resources-has made steady progress in bringing the
Persian Gulf region into its geopolitical orbit. In Washington's calculus,
securing oil supplies has consistently trumped the pursuit of human rights
and democracy.

U.S. policy toward the Middle East has long relied on building up proxy
forces in the region and generously supplying them with arms. After the Shah
of Iran, the West's regional policeman, was toppled in 1979, Iraq became a
surrogate of sorts when it invaded Iran. Washington aided Iraq in a variety
of ways, including commodity credits and loan guarantees, indirect arms
supplies, critical military intelligence in Baghdad's long battle against
Iran, a pro-Iraqi tilt in the "tanker war," and attacks on Iran's navy.

Beginning in the 1970s, but particularly in the wake of the 1991 Gulf War,
the U.S. supplied Saudi Arabia and allied Persian Gulf states with massive
amounts of highly sophisticated armaments. After the Gulf War, U.S. forces
never left the region completely. By prepositioning military equipment and
acquiring access to military bases in Saudi Arabia, Kuwait, Bahrain, and
Qatar, Washington prepared the ground for future direct intervention as
needed.

In the Persian Gulf and adjacent regions, access to oil is usually secured
by a pervasive U.S. military presence. From Pakistan to Central Asia to the
Caucasus and from the eastern Mediterranean to the Horn of Africa, a dense
network of U.S. military facilities has emerged-with many bases established
in the name of the "war on terror."

Although the U.S. military presence is not solely about oil, oil is a key
reason. In 1999, General Anthony C. Zinni, then the head of the U.S. Central
Command, testified to the Senate Armed Services Committee that the Persian
Gulf region is of "vital interest" to the U.S. and that the country "must
have free access to the region's resources."28

Bush administration officials have, however, categorically denied oil is one
of the reasons why they are pushing for regime change in Iraq. "Nonsense,"
Defense Secretary Donald Rumsfeld told 60 Minutes' Steve Kroft in
mid-December 2002. "It has nothing to do with oil, literally nothing to do
with oil."

But oil industry officials interviewed by 60 Minutes on December 15 painted
a different picture. Asked if oil is part of the equation, Phillip Ellis,
head of global oil and gas operations for Boston Consulting replied, "Of
course it is. No doubt."

In fact, oil company executives have been quietly meeting with U.S.-backed
Iraqi opposition leaders. According to Ahmed Chalabi, head of the Iraqi
National Congress, "The future democratic government in Iraq will be
grateful to the United States for helping the Iraqi people liberate
themselves and getting rid of Saddam." And he added that "American
companies, we expect, will play an important and leading role in the future
oil situation in Iraq."


EndNotes

National Energy Policy Development Group, Reliable, Affordable, and
Environmentally Sound Energy for America's Future (Washington: U.S.
Government Printing Office, May 2001), pp. x and 1-13.
Ibid., pp. 8-3 and 8-7.
James Dao, "In Quietly Courting Africa, White House Likes Dowry," New York
Times, September 19, 2002.
Production and reserves are from BP Statistical Review of World Energy 2002;
exports are from OPEC Annual Statistical Bulletin 2001 (Vienna: 2002), Table
26.
National Energy Policy Development Group, Reliable, Affordable, and
Environmentally Sound Energy for America's Future (Washington: U.S.
Government Printing Office, May 2001), p. 8-4.
BP Statistical Review of World Energy 2002. Ultimately recoverable estimate
is from U.S. Department of Energy, Energy Information Administration (EIA),
Saudi Arabia Country Analysis Brief, October 2002,
.
Past Saudi production increases are from BP Statistical Review of World
Energy 2002; potential for current increase is from Jeff Gerth, "U.S. Fails
to Curb Its Saudi Oil Habit, Experts Say," New York Times, November 26,
2002.
U.S. Department of Energy, Energy Information Administration (EIA), Iraq
Country Analysis Brief, October 2002,
. Iraqi oil officials agree,
estimating reserves at 270-300 billion barrels in "Iraq's Oil Industry: An
Overview," Platts, .
U.S. Department of Energy, Energy Information Administration (EIA), Iraq
Country Analysis Brief, October 2002,
.
Fadhil J. Chalabi, "Iraq and the Future of World Oil," Middle East Policy,
vol. vii, no. 4, October 2000,
.
Trevor Royle, "The World's Petrol Station: Iraq's Past Is Steeped in Oil …
and Blood," Sunday Herald, October 6, 2002,
.
OPEC overproduction data is from Neela Banerjee, "As Its Members Flout Oil
Quotas, OPEC Considers New Approach," New York Times, December 12, 2002.
Dan Morgan and David B. Ottoway, "In Iraqi War Scenario, Oil Is Key Issue,"
Washington Post, September 15, 2002.
Stratfor, "War in Iraq: What's at Stake for Russia?" November 22, 2002
(distributed electronically).
Arbatov quoted in Sabrina Tavernise, "Oil Prize, Past and Present, Ties
Russia to Iraq," New York Times, October 17, 2002.
Quote from James A. Paul, "Iraq: The Struggle for Oil," August 2002, Global
Policy Forum website,
.
Calculated from OPEC Annual Statistical Bulletin 2001 (Vienna: 2002), Table
77.
Ibid.
U.S. Department of Energy, Energy Information Administration (EIA), Iraq
Country Analysis Brief, October 2002,
.
"The Iraq Oil Industry After Sanctions," Middle East Institute conference
proceedings summary, February 29, 2000, as reposted on the Global Policy
Forum website, .
Deutsche Bank estimates, reported in U.S. Department of Energy, Energy
Information Administration (EIA), Iraq Country Analysis Brief, October 2002,
. The higher estimate is from
Zarubezhneft, a Russian state-owned company. See Sabrina Tavernise, "Oil
Prize, Past and Present, Ties Russia to Iraq," New York Times, October 17,
2002.
U.S. Department of Energy, Energy Information Administration (EIA), Iraq
Country Analysis Brief, October 2002,
.
Speech by Kenneth T. Derr,

.
Chalabi quote is from Dan Morgan and David B. Ottoway, "In Iraqi War
Scenario, Oil Is Key Issue," Washington Post, September 15, 2002. Peter
Beaumont and Faisal Islam, "Carve-Up of Oil Riches Begins," The Observer
(United Kingdom), November 3, 2002.
Stratfor, "War in Iraq: What's at Stake for Russia?" November 22, 2002
(distributed electronically).
Sabrina Tavernise, "Oil Prize, Past and Present, Ties Russia to Iraq," New
York Times, October 17, 2002.
Serge Schmemann, "Controlling Iraq's Oil Wouldn't Be Simple," New York
Times, November 3, 2002.
Zinni quote is from James A. Paul, "Iraq: The Struggle for Oil," August
2002, Global Policy Forum website,
. Testimony of
April 13, 1999.